Natural gas futures stumbled in post-Labor Day trading as the market proved unable to sustain recent highs even as Gulf of Mexico (GOM) production outages lingered. Forecasts for balmy mid-September temperatures did little to incentivize buying interest, and the October Nymex contract fell 14.4 cents to settle at $4.568/MMBtu.
At A Glance:
- Production slowly crawling higher
- Weather becoming less supportive
- California demand high
In the physical market, huge gains in the Northeast and in the West sent NGI’s Spot Gas National Avg. soaring 37.5 cents higher to $4.795.
Looking at the latest supply and demand data points early Tuesday, Bespoke Weather Services noted some production returning to the market, bringing Lower 48 supply back to 91 Bcf/d.
“The bearish component comes via what looks like more of a loss in industrial demand thanks to the impact of Hurricane Ida, which is boosting estimates for this week’s” Energy Information Administration (EIA) storage report, Bespoke said. “Intuitively, one would think this is a short-term issue, as other components of the supply/demand balance remain strong, but after such a massive move higher over the last couple of weeks it does not take much bearishness in the data to pull the market back.”
NGI is modeling a below-average 38 Bcf injection into U.S. gas stocks for Thursday’s EIA report, which covers the week ended Sept. 3. That would compare with a five-year average 65 Bcf injection. The year-earlier build for the period is also 65 Bcf.
Bespoke observed warmer forecast trends over the extended Labor Day weekend, including higher cooling degree day totals across the eastern half of the nation from late this week through next week.
After mid-September, temperatures start to transition into heating degree day (HDD) territory, “and those will run below normal levels,” Bespoke said. “HDD in September do not add much to true demand, however, so we would still rate the forecast changes as a little more bullish versus Friday.”
NatGasWeather, meanwhile, viewed days eight through 15 of the outlook period as “quite bearish” in midday model runs Tuesday. Models showed comfortable highs in the 70s and 80s for much of the country aside from some cooler conditions in northern regions and some hotter temperatures in the Southwest, according to the firm.
“Overall, we view the pattern as seasonal/near normal for the front seven days but bearish thereafter,” NatGasWeather said in a note to clients Tuesday. “What could also be aiding selling today is the supply/demand balance has loosened a little compared to late last week.”
Still, a large majority of Gulf of Mexico (GOM) output remained shut in Tuesday. About 78% of GOM natural gas production, totaling just under 1.74 Bcf/d, was still offline, according to the Bureau of Safety and Environmental Enforcement.
How quickly GOM supply returns following Ida will be a key question for the market in the near term, according to EBW Analytics Group.
“Prolonged outages are likely to help cushion price declines,” the EBW analysts said. “If production shows signs of returning more quickly, however, downward price pressure on Nymex gas is likely to intensify.”
From a technical standpoint, even after Tuesday’s sell-off, natural gas remained comfortably above the critical support levels that would need to hold to show prices haven’t yet found a top, according to ICAP Technical Analysis.
“Would need the bears to force natural gas back below $4.418-4.411-4.390 to suggest trouble could be brewing,” ICAP analyst Brian LaRose said. “To have a case for a more significant top bears would need to crack $4 as well. So long as the bulls can keep natural gas above $4.418-4.411-4.390 a rise to $4.742-4.818-4.836, $4.990-5.007, even $5.354-5.410-5.469-5.496-5.517-5.600 cannot and should not be ruled out from here.”
Energy Aspects in a recent research note updated its projected end-October 2021 storage carryout to 3.57 Tcf. That latest figure reflects a “lagging” post-Ida recovery.
While production has outperformed the firm’s expectations this injection season, industrial demand has underperformed.
“The biggest change from our pre-season forecast was the weakness in industrial demand,” Energy Aspects said. “…We saw little upside to demand and viewed a consistent risk to the downside in the sector given supply chain issues and need for planned and unplanned maintenance at plants that had been operating at high capacity utilization.”
While industrial demand is still up 1.1 Bcf/d year/year, the sector has been “stymied by both material and workforce shortages,” according to the firm.
EIA data for June suggests “even more downside risk,” with industrial demand dropping sharply in Louisiana.
“Other states with a fair share of industrial demand also showed demand declines that appear to be sharper than normal for seasonality,” Energy Aspects said. “…While work stoppages at auto assemblies due to the microchip shortage were widely reported, another month of official data may also indicate that some portions of the sector are becoming price sensitive, especially those outside of steel and petchems.”
SoCal, Northeast Rallies
In the physical market, prices surged higher across the Northeast and Appalachia, even as locations throughout the two regions continued to trade at a discount to Henry Hub.
Prices seemed to draw support from forecasts showing some above normal temperatures for many East Coast demand centers this week and again by the weekend. Maxar’s Weather Desk showed highs along the Interstate 95 corridor climbing into the mid to upper 80s on Wednesday. Hotter temperatures were expected to return by Sunday and continue into next week.
With the injection season rapidly drawing to a close, stockpiles in the EIA East region stood at 678 Bcf as of Aug. 27, lagging the five-year average by 8.1% and 13.9% below year-ago levels.
Southern California Gas (SoCalGas) warned shippers prior to the weekend that higher temperatures and increased natural gas demand were expected in the region. The operator had advised that noncore customers on its southern system could be required to reduce or stop using natural gas.
SoCalGas reported estimated system demand of around 2.7 million Dth for Tuesday, up from less than 2.5 million Dth on Monday. Demand was expected to continue hovering around the 2.7 million Dth/d mark over the next few days, while receipts were expected to remain capped at around 2.3 million Dth/d.
Elsewhere, prices generally headed lower through the middle third of the Lower 48 Tuesday. Regional averages in Texas, Louisiana, the Midcontinent and the Midwest all shed anywhere from a penny to just over a nickel.